Saturday, February 28, 2009

JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.***

I would hazard a guess that this is easily the worst outcome for any assets that have ever carried a “triple A” stamp. No wonder so many investors are now so utterly cynical about anything that bankers or rating agencies might say these days.

Since the credit default swap and CDO market are so closely linked, this could also spell trouble for CDS.

The best bet for investors may be to buy a farm and escape from the cities, as a prolonged recession could lead to war, as the Great Depression did. If the global economy doesn’t recover, usually people go to war.

I expect to see social unrest, civil unrest in the United States a couple of years from now. Yes its changing the entire situation in the United States, the US is the largest debtor in the history of the world. There is a dramatic change taking place.

The world's century is moving from the west to the east, to Asia and many people have not figured this out yet.

Yes, you are going to see a lot of turmoil in the United States in the next 3, 4, 5 years.

But he also believes that - with enough government intervention - the economy will turn around within a year or 2.

In addition, he has never specifically said that the unrest could spread to the developed world.

Because Roubini is optimistic about the odds of a government-induced recovery, he is not the real Dr. Doom.

Schiff

Schiff also called the economic crisis along time ago. He's been right about a lot of things. And he frequently says that the worsening financial crisis in the U.S. could lead to martial law.

But for years, Schiff's theory has been that the U.S. would tank, but that - after a brief period of linkage where they would be dragged down with America - Asia and Europe would "decouple" and soar to new heights of prosperity. Indeed, the trademarked motto of Schiff's company, Europacific Capital, is "Because there's a bull market somewhere."

So far it appears that Schiff has been overly optimistic about the ability of Europe and Asia to recover. Those countries are not decoupling from America. Indeed, Europe may be even worse off than the U.S. See this and this.

So he's not the real Dr. Doom.

Faber

Faber also called this crisis, as well as the 1987 stock market crash. He is coninced that the U.S. will go bankrupt.

And Faber has recently said that Asia and Europe are wrecks economically.

Faber has repeatedly warned about a crash-induced loss of democracy and the institution of "either facism or socialism".

The above is pretty gloomy, and so Faber is a real Dr. Doom.

However, he's not all doom and gloom. Being a follower of wave theory, Faber still thinks traders can make money doing short-term trades within the near-term future.

Calente and Schoon

Top trend researcher Gerald Calente and writer Darryl Schoon are the gloomiest forecasters of all.

Calente called the economic crash at least a year before it happened. He is now forecasting tax revolts, crime and revolution for America. He thinks the U.S. is done-for, and the rich and powerful are simply trying to secure their own lifeboats.

Schoon forecast several years ago the complete breakdown of all paper-based currencies, as well as all paper-based assets and investments and - indeed - the end of modern civilization (at least for a while).

On the other hand, well-known Elliot Wave market timer Robert Prechter - who has long predicted the crash - is forecasting that gold will go significantly lower.

Note 2: Many big names now think this could be worse than the Great Depression. However, I am only mentioning people who predicted the financial crisis well in advance and were roundly ridiculed for their prescience.

Honorary mention goes to Buckminister Fuller. I just read the forward to a book Fuller wrote in 1983. He not only predicted a break down of our "modern" economy, but said that humanity might go extinct if we don't get our act together and start behaving wisely. But that's for another blog . . .

I apologize for failing to mention the other visionaries who called the crisis in advance. There are quite a few. For the sake of brevity, I have not included all of them.

You know that our economy has been turned into a socialist system. You're already probably mad about that.

But there are many other ways in which America is going the way of the Soviet Union.

For example, China is criticizing America's human rights record, just like we used to criticize Soviet human rights abuses.

And George Soros says the world financial system has effectively disintegrated, and that the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

So the official finding by the U.S. Energy Department that the DOE cannot account for nuclear materials at 15 locations caught my eye. Remember, in the former Soviet Union, nuclear material frequently "went missing" and was then sold on the black market.

And just as the Soviet Union broke up, there are more and more indications that the US will break up. See this, this, this, this and this.

Indeed, a man who lived through the break up of the USSR goes around the country offering advice for Americans on how to weather the coming dissolution of the US.

Is it worth listening to this former Russian? Da, it might be wise . . .

Thursday, February 26, 2009

The largest swings have often occurred during the last hour of trading, prompting a closer look by the Financial Industry Regulatory Authority, a nongovernmental regulator of securities firms. The end of the trading day is when institutional investors, including hedge funds and mutual funds, rush to meet client demands to pull cash out of the market, analysts said.

Today, trader Tyler Durden wrote about a tip he received from a trusted source:the average equity hedge fund is 70% in cash at the end of each trading day. Durden comments:

Explains why the market performs like a schizophrenic day trader, as investors try to game the greater fool in unison, running the market up and down especially in market leading sectors such as financials. As long as a fund is not the last man in, the first 50% in any wave are set to make profits. While this has long been the modus operandi for ... notable algo trading outfits ..., the fact that it is spreading to most hedgies is shocking ....

Durden told me by email that "most portfolio managers are well aware of ths fact, and the ETF explosion especially in 2x and 3x level is all a direct function."

A 2005 letter in premier scientific journal Naturereviews the research on trust and economics:

Trust ... plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country's institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success.

Forbes wrote an article in 2006 entitled "The Economics of Trust". The article summarizes the importance of trust in creating a healthy economy:

Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you've persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you're going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust--now imagine trying to arrange a mortgage.

Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it's rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

"If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia," ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country's income. ***

Above all, trust enables people to do business with each other. Doing business is what creates wealth. ***

Economists distinguish between the personal, informal trust that comes from being friendly with your neighbors and the impersonal, institutionalized trust that lets you give your credit card number out over the Internet.

Trust is the oil in the engine of capitalism, without it, the engine seizes up.

Confidence is like the gasoline, without it the machine won't move.

Trust is gone: there is no longer trust between counterparties in the financial system. Furthermore, confidence is at a low. Investors have lost their confidence in the ability of shares to provide decent returns (since they haven't).

The drop in trust, we believe, is a major factor behind the deteriorating economic conditions. To demonstrate its importance, we launched the Chicago Booth/Kellogg School Financial Trust Index. Our first set of data—based on interviews conducted at the end of December 2008—shows that between September and December, 52 percent of Americans lost trust in the banks. Similarly, 65 percent lost trust in the stock market. A BBB/Gallup poll that surveyed a similar sample of Americans last April confirms this dramatic drop. At that time, 42 percent of Americans trusted financial institutions, versus 34 percent in our survey today, while 53 percent said they trusted U.S. companies, versus just 12 percent today.

As trust declines, so does Americans’ willingness to invest their money in the financial system. Our data show that trust in the stock market affects people’s intention to buy stocks, even after accounting for expectations of future stock-market performance. Similarly, a person’s trust in banks predicts the likelihood that he will make a run on his bank in a moment of crisis: 25 percent of those who don’t trust banks withdrew their deposits and stored them as cash last fall, compared with only 3 percent of those who said they still trusted the banks. Thus, trust in financial institutions is a key factor for the smooth functioning of capital markets and, by extension, the economy. Changes in trust matter.

They quote a Nobel laureate economist on the subject:

“Virtually every commercial transaction has within itself an element of trust,” writes economist Kenneth Arrow, a Nobel laureate. When we deposit money in a bank, we trust that it’s safe. When a company orders goods, it trusts its counterpart to deliver them in good faith. Trust facilitates transactions because it saves the costs of monitoring and screening; it is an essential lubricant that greases the wheels of the economic system.

Indeed, as leading economists have pointed out, the big financial institutions don't trust each other, because they know that all of the other companies might have hidden their problems or gamed their books (see this, for example). See also this.

There's Nothing We Can Do!

The main problem we are facing is that our leaders are pretending that there is not much they can do to fix the economic crisis.

But the truth is that the powers-that-be are getting too many perks from the current system to really fix it.

Let's look at an analogy. A gang member keeps on getting thrown into jail for selling cocaine. The court-appointed psychiatrist says "why don't you stop?". The gangbanger says "I don't know how to stop". In reality, the gentleman is making money dealing cocaine, and maybe getting a sense of safety and community in belonging to a gang.

Or here's an analogy closer to home for me. My very young daughter frequently throw tantrums. When my wife and I tell her to stop screaming, she says "I don't know how to stop." We tell her she just has to decide to stop screaming, and then the screaming will stop. She repeats "No, I don't know how to stop!" and keeps on screaming. Obviously, the pay-off of getting our attention (and getting our goat) makes it worthwhile for her to keep on screaming.

Similarly, Bernanke, Geithner, Summers, Barney Frank, Chris Dodd, Obama and the rest of the gang pretend they don't know how to fix the economy, because, in reality, their corporate funders don't want it to be fixed.

How Can We Fix the Economy?

Given that there is a total breakdown in trust, our leaders can only help to turn the economy around if they admit that they've blown it.

They have to admit that:

The entire modern financial system has been built on a house of cards (see this and this)

Our economy cannot prosper without a strong manufacturing base, and without services which actually help people (instead of doing othing but shuffling money around from one financial desk to another)

They allowed far too much leverage in the system and far too much fractional reserve banking

Throwing more money at the too-big-to-fail companies will not help anything, and that it is the American people who need relief

The Fed can't simply blow one bubble after another to rescue the economy

Things have been shrouded in too much secrecy, and that we need radical openness of the financial system

Therefore, I passionately believe that a new honesty has to take place among our government and corporate institutions, and that the truth about these crimes has to be fully revealed before our economy will fully recover.

Note 2: It's obvious that many politicians think they have to do something about the economic crisis. And so they throw trillions of dollars into bailouts, "loans" and other schemes which are actually making the problem worse.

This is the flip side to the problem of pretending you can't do anything. Doing something just to be doing something isn't very smart - especially when restoring trust would cost trillions less and would be much more effective.

Agora Financial's Rude Awakening notes that the U.S. Government is now considered less credit-worthy than Pepsi or IBM by the credit default swap market:

As the nearby chart indicates, the price of insuring Treasury debt against default now costs more than the price of insuring the debt of almost any AA or A+ rated company in the country. In other words, the Treasury is not quite as AAA as it should be, according to the buyers of credit default swaps.

Ron Paul schooled Bernanke and Congress this week on some basic economic principles. Here are some of his best quotes:

You can't reinflate the bubble!

If we think we can patch up a system that has failed, it's not going to work.

We have a total misunderstanding of what credit is, versus capital. Capital can't come from the thin-air creation by a Federal Reserve system, capital has to come from savings. We work hard, produce, live within our means, and what is leftover is called capital. This whole idea that we can 're-capitalize' markets by merely turning on the printing presses and increasing credit is a total fallacy.

“The entire Landesbanken system is rotten,” said Hans Redeker, currency chief at BNP Paribas.”Credit will collapse if they are allowed to fail so they have to be recapitalized. But it is not just the banks in trouble: Germany’s entire export structure has been hit drastically.”

“German CDS spreads are going massively higher. German bank exposure to Eastern Europe, although less than Austria, is still very high. The markets have started to price in a de facto bail-out of Eastern Europe and they think that Germany that will have to pay the bill,” he said.

The rating agency Standard & Poor’s said in a report on Tuesday that the region was “shuddering to a halt”, with a number of countries were “crumbling under the weight of high foreign currency debt.” It is unclear whether they can roll over debts as Western banks retreat to their home market.

S&P said foreign debt is 115pc of GDP in Estonia, 103pc in Bulgaria, 93pc in Hungary, all far above danger level. “All the ingredients of a major crisis are in place,” said Jean-Michel Six, the group’s Europe economist.

"We're not making it up . . . We're working along a program that has been applied in various contexts. We're not completely in the dark".

Now I'm reassured. Except for one little thing . . .

Bernanke is a disciple of Milton Friedman (who actually came up with the whole "Helicopter" thing). And Friedman and the mainstream economics that Bernanke follows are totally wrong about how to prevent or get out of a depression.

Thanks to Milton Friedman and neoclassical economics in general, the Fed ignored the run up of debt that has caused this crisis, and every rescue engineered by the Fed simply increased the height of the precipice from which the eventual fall into Depression would occur.

Given that the most basic economic theories that Bernanke has been operating under are nothing but voodoo, it might be better if he were just making it up. Like a monkey typing on a computer, he would be bound to accidentally do something right every on occassion.

At a biodefence meeting on 24 February, Joseph Michael, a materials scientist at Sandia National Laboratories in Albuquerque, New Mexico, presented analyses of three letters sent to the New York Post and to the offices of Senators Tom Daschle and Patrick Leahy. Spores from two of those show a distinct chemical signature that includes silicon, oxygen, iron, and tin; the third letter had silicon, oxygen, iron and possibly also tin, says Michael. Bacteria from Ivins' RMR-1029 flask did not contain any of those four elements.

Two cultures of the same anthrax strain grown using similar processes — one from Ivins' lab, the other from a US Army facility in Utah — showed the silicon-oxygen signature but did not contain tin or iron. Michael presented the analyses at the American Society for Microbiology's Biodefense and Emerging Diseases Research Meeting in Baltimore, Maryland.

It had previously been known that the killer anthrax contained silicon - an agent for weaponizing anthrax. But I have never previously read that the killer samples also contained iron and tin.

As the world's top anthrax experts have pointed out, Ivins did not possess either the know-how or the equipment to weaponize the anthrax. See this and this.

In addition, as Nature points out:

Ravel also sequenced the genome of a Bacillus subtilis strain that was found in one of the letters. That sample did not match a B. subtilis strain found in Ivins' lab, says Bannan, but the bacterial contamination still could have come from somewhere else in Ivins' institution.

However, Leahy previously suggested a “truth commission” could be modeled after a panel that probed apartheid in South Africa. The commission should have “subpoena power and witnesses would not face charges except if they commit perjury," Leahy told the Wall Street Journal earlier this month.

I have previously suggested such an approach with regards to 9/11 (I am obviously open to prosecutions as an alternative).

Indeed, there is no reason that 9/11 should not be added to the subjects of the commission since - at the very least - Bush officials were criminally negligent in allowing 9/11 to happen and covering up the facts.

Tuesday, February 24, 2009

Yesterday, Wired wrote an article explaining how CDS actually formed the very heart of the risk model used by the big banks and investment houses, ratings agencies, bondholders, and just about everyone else in the financial world. That model was fundamentally flawed, and so the financial house of cards built upon it has come crashing down.

Here are excerpts providing the basics of the article (the article is worth reading in full):

[David] Li's formula, known as a Gaussian copula function ... was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.***

In 2000, while working at JPMorgan Chase, Li ... came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.***

When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market.... Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).***

The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants [i.e. math wizards] saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.***

Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared.

The article makes it clear that people warned against the use of Li's CDS-based formula, but - due to greed and stupidity - the warnings went unheeded.

Remember, even if the market does rally in the short-run, Faber, Prechter and McHugh are all forecasting a very deep depression afterwards and none of them are recommending that you buy and hold stock long-term. So this is a trader's game, not a long-term investor's game.

Note: I am not an investment advisor and this should not be taken as investment advice.

But the chairman warned that a lot could still go wrong. "The downside risks probably outweigh those on the upside," he said, pointing to the global nature of the downturn and to the possibility of "the destructive power of the so-called adverse feedback loop, in which worsening economic and financial conditions become mutually reinforcing."

There is no official definition of a depression, but that is as close as any: An economy that is not self-healing but is instead self-destructing.

The Market Watch article says twice that Bernanke is "worried about a depression". He's not alone (see this and this).

The government could have forced the banks to use their bailout money for loans.

For example, unlike taxpayers in European countries - who get voting shares in return for their bailouts - the U.S. taxpayers have no say in the management of the companies they are giving their hard-earned money to.

And European bailouts included provisions protecting against excessive dividends and executive bonuses, and requiring loans to homeowners and small businesses:

"Five days before Paulson struck his deal with the banks, British Prime Minister Gordon Brown negotiated a similar bailout — only he extracted meaningful guarantees for taxpayers: voting rights at the banks, seats on their boards, 12 percent in annual dividend payments to the government, a suspension of dividend payments to shareholders, restrictions on executive bonuses, and a legal requirement that the banks lend money to homeowners and small businesses.

In sharp contrast, this is what U.S. taxpayers received: no controlling interest, no voting rights, no seats on the bank boards and just five percent in dividend payouts to the government, while shareholders continue to collect billions in dividends every quarter. What's more, golden parachutes and bonuses already promised by the banks will still be paid out to executives — all before taxpayers are paid back."

Now, the Fed is begging banks to put the money into new loans or bolster loss reserves, instead of paying dividends for shareholders.

Today our 10 largest banking companies hold some two-thirds of the nation's banking assets, and some are enormously complex. Continental had less than 2% of the nation's banking assets, and by today's standards it was a plain-vanilla bank. This is important for three reasons.

First, any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically. We are in the middle of a serious economic downturn where deflation is a realistic concern. Do we really think that dismantling our largest banks would be helpful? I don't.

What's more, we won't be able to stop at nationalizing one or two banks. ***

Second, for nationalization to work there needs to be a reasonable exit strategy. In the case of Continental, we had scores of options for returning the bank to private hands, including a public offering or a sale to any number of domestic and foreign banks and investor groups.

Today, who has the wherewithal, legal authority, and desire to purchase our largest banks? No one comes to mind, particularly if we rule out foreign groups, which I suspect would not pass muster due to national security concerns about ceding that much power over our economy to foreign powers.

Third, who will run these companies when we dismiss the existing senior managers and board members? We had significant difficulties attracting quality people to Continental even without today's limits on compensation.

So-called experts frequently cite the success of the Swedish experience with bank nationalization in the last decade. Nothing could be less relevant. Sweden's population, economy and banking system are roughly the size of Ohio's. Sweden's largest bank is roughly 10% the size of each of our three largest banking companies. Moreover, Sweden nationalized only Gota Bank -- and that was after it had already collapsed.

The Obama administration should declare that nationalization of any major bank is off the table . . .

The guy with the most experience of nationalizing banks in the U.S. says it won't work and we shouldn't do it.

Will our leaders listen?

Note: A reader quoted Senator Bernie Sanders: "If a company is too big to fail, it is too big to exist." Several readers argue that Isaac is wrong, and that the big banks should indeed be downsized.

The premium banks charge each other for short-term loans, the so-called Libor-OIS spread, rose above 1 percentage point last week for the first time since Jan. 9. Contracts traded in the forward market indicate the gauge, which measures banks reluctance to lend, will remain higher for the rest of the year than before Sept. 15, when the bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

“Libor-OIS remains a barometer of fears of bank insolvency,” former Federal Reserve Chairman Alan Greenspan said in an interview. “That fear has been substantially reduced since mid-October, but the decline has stalled well short of any semblance of normal markets.”

The lack of lending between banks helped send the U.S. economy into a recession and may delay any recovery. Turmoil in money markets stoked last year’s tumble in stocks and fueled demand for the relative safety of Treasuries, gold and Japanese yen. Since Lehman collapsed, the Standard & Poor’s 500 Index lost 35 percent, 10-year Treasury yields fell below 3 percent, gold topped $1,000 an ounce and the yen climbed 12 percent.

Indeed, Paul Volcker, Nobel prize winning economist Joseph Stiglitz, former Federal Reserve Governor Frederic Mishkin, PhD economist Marc Faber, former Goldman Sachs chairman John Whitehead and many others have also said this could be worse than the Great Depression.

And if Soros is right that this is like the demise of the Soviet Union, then the question arises whether the financial crisis might lead to nations breaking up. The forecasters at Leap2020 certainly think so.

The global economy may be deteriorating even faster than it did during the Great Depression, Paul Volcker, a top adviser to President Barack Obama, said on Friday.

Volcker noted that industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,'' Volcker told a luncheon of economists and investors at Columbia University.

The first head of the Department of Homeland Security - Tom Ridge - has agreed with the recent report by the International Commission of Jurists which said that anti-terror measures worldwide had seriously undermined international human rights law.

Ridge also said that even terrorism suspects are entitled to due process.

Friday, February 20, 2009

Any psychologist examining capitalism would quickly diagnose a manic depressive. Today's upheavals, coming after a generation of relative calm in the United States, may seem shocking to Americans who have primly observed bank runs in Argentina or scoffed at Japan's inexplicable reluctance to bury its zombie banks.

But financial crises have been common since the South Sea Bubble of 1720 and have grown more frequent in the last three decades, affecting larger and larger countries.

The problems always begin with asset bubbles that make every investor look smart. Neighbors envy neighbors getting rich and jump on board, often taking on debt to do so. Bubbles always burst, ending in tears and handcuffs and leaving everyone poorer.

It is human nature to "forget what happened before, to think that we've reinvented penicillin," said Reinhart, whose forthcoming book with Rogoff is called "This Time Is Different: Eight Centuries of Financial Folly." People think, "Oh yes, these things have happened, but they happened to somebody else, somewhere else, at another point in time. They don't happen to us. If you look at the mentality in the run-up to the current crisis, that's exactly what was going on with the real estate market."

"If you look at Japan, if you look at Sweden, if you look at the S&L crisis in the U.S., it's clear what's going to happen," said Pete Kyle, who holds a chair in finance at the University of Maryland. "What's going to happen is the bad assets are going to be removed from the banks, the government is going to wind up owning the assets and winding them down. The government will take its losses and, over time, maybe 10 or 15 years, we'll figure out how much money we've lost."

The banks also need new capital, maybe $1 trillion to $2 trillion more. "The only issue is how fast it's going to occur," Kyle said.

Indeed, some people argue that the banks are already quietly being nationalized. See, for example, this and this.

Judge Richard J. Holwell of the U.S. District Court for the Southern District of New York said in a decision Friday that the government is directed to comply with FOX Business’s request under the FOIA “within 30 days and to produce a Vaughn index with 45 days.”

That means Treasury must comply with FOX Business’s request by Monday, March 23, and must produce a Vaughn index by Monday, April 6.

As small businesses find it impossible to borrow money and customers are slower to pay bills, the barter economy is becoming a crucial way for many companies to find the cash they need to keep operating.***

In 2008, about 250,000 North American companies conducted barter transactions worth more than $16 billion, according to the International Reciprocal Trade Association, a nonprofit based in Portsmouth, Va., that regulates and provides standards for modern trade and barter-service companies.

During testimony on his nomination, when Secretary of the Treasury Geithner was asked about errors made in the Great Depression, he replied:

There were two:1. Monetary stimulation ended too soon. 2. Heed was not taken of the dollar foreign exchange position.

Think hard on the implications of both these points.

The dollar rose into the Great Depression, acting as a break on American exports as protectionism was rising everywhere. You can be sure the present dollar rally as a place of refuge has no meaningful future.

You can be sure that [the] estimate of $20 trillion in total monetary and fiscal stimulation is conservative.

What's Sinclair saying?

That Geithner and the boys will probably print more dollars than anyone imagines - at least $20 trillion dollars - and that the bailouts and "stimulus" packages will continue for years, thus destroying the dollar and ushering in hyperinflation.

In the quote of the week, economist John Williams - who has been tracking the real fundamentals of the economy for many years at his website Shadow Stats - said:

"The Federal Government Is Bankrupt ... If The Federal Government Were A Corporation … The President And Senior Treasury Officers Would Be In Federal Penitentiary."

What's Williams talking about?

He explains:

"The federal government's deficit is hemorrhaging at a pace which threatens the viability of the financial system," Williams added. "The popularly reported 2009 [deficit] will clearly exceed $2 trillion on a cash basis and that full amount has to be funded by Treasury borrowing. ***

"The appetite of foreign buyers to purchase continued trillions of U.S. debt has become more questionable as the world has witnessed the rapid deterioration of the U.S. fiscal condition in the current financial crisis," Williams noted. ***

"Truthfully," Williams pointed out, "there is no Social Security 'lock-box.' There are no funds held in reserve today for Social Security and Medicare obligations that are earned each year. It's only a matter of time until the public realizes that the government is truly bankrupt and no taxes are being held in reserve to pay in the future the Social Security and Medicare benefits taxpayers are earning today." ***

The public has a right to know just how bad off the federal government budget deficit situation really is, especially since the situation is rapidly spinning out of control.

Apparently, the $53 trillion dollars in total government liabilities as of July 2008 - $455,000 per American household - is now up to some $65.5 trillion. As the article quoting Williams points out, that is greater than the GDP of the entire world.

The number of high-level officials and experts warning that the economic crisis could lead to revolt and revolution world-wide - even in the U.S. - is growing every day:

The U.S. Army War College in November warned in a monograph [click on Policypointers’ pdf link to see the report] titled “Known Unknowns: Unconventional ‘Strategic Shocks’ in Defense Strategy Development” of crash-induced unrest:

The military must be prepared, the document warned, for a “violent, strategic dislocation inside the United States,” which could be provoked by “unforeseen economic collapse,” “purposeful domestic resistance,” “pervasive public health emergencies” or “loss of functioning political and legal order.” The “widespread civil violence,” the document said, “would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.”

“An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home,” it went on.

“Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States. Further, DoD [the Department of Defense] would be, by necessity, an essential enabling hub for the continuity of political authority in a multi-state or nationwide civil conflict or disturbance,” the document read.

"The global economic crisis ... already looms as the most serious one in decades, if not in centuries ... Economic crises increase the risk of regime-threatening instability if they are prolonged for a one- or two-year period," said Blair. "And instability can loosen the fragile hold that many developing countries have on law and order, which can spill out in dangerous ways into the international community."***

"Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one-to-two-year period."***

“The crisis has been ongoing for over a year, and economists are divided over whether and when we could hit bottom. Some even fear that the recession could further deepen and reach the level of the Great Depression. Of course, all of us recall the dramatic political consequences wrought by the economic turmoil of the 1920s and 1930s in Europe, the instability, and high levels of violent extremism.”

Blair made it clear that - while unrest was currently only happening in Europe - he was worried this could happen within the United States.

Former national security director Zbigniew Brzezinski warned "there’s going to be growing conflict between the classes and if people are unemployed and really hurting, hell, there could be even riots."

The chairman of the Joint Chiefs of Staff warned the the financial crisis is the highest national security concern for the U.S., and warned that the fallout from the crisis could lead to of "greater instability".

The biggest gold bugs have said for years that the price of gold usually mirrors the Dow Jones stock market index, and that it will eventually end up there again. For example, Peter Cooper recently wrote:

The Dow Jones Index will plunge again, way beyond the 7,000 limit target I suggested long ago for 2008, and head to 4-5,000, while at the same time the price per ounce of the yellow metal will tip the $4-5,000 an ounce level, way above the $2,000 now predicted by Citigroup

I've never paid much attention to such claims, because they seemed unsubstantiated.However, last year PhD economist Krassimir Petrov looked at this question and said pretty much the same thing:

On the other hand, secular stock bear markets usually coincide with secular gold bull markets. At the secular peak for gold, the Gold-Dow ratio is in the range of 1-2. As you can see on the chart, 1900 recorded a low of 1.7; 1929 recorded a low of two; 1980 recorded a low of about one. This means that when the gold bull market peaks, the price of gold will roughly equal the Dow Jones Index (DJI). Thus, we should expect that gold outperform the DJI in the coming 10-15 years about 10-20 times, in order to bring that Dow-Gold Ratio down to the range of 1-2.

[Click for full chart] So, how high will gold go? The correct answer is simple: as high as Dow Jones.

I don't know much about Petrov. So what really caught my eye is that Marc Faber is saying something similar:

"One day the price of gold will be higher than the Dow Jones."

"The CRB, a broad index of commodities, fell for 20 years in nominal terms, from 1980 to 1999. It is now up 12% and is still inexpensive. The Dow and the S&P are up substantially from the 1980s or early 1990s. Everyone thinks fiscal and monetary measures will work to fix the financial system. I don't. They will be disastrous and fuel inflation.

Simply put, since 2000, gold has risen at a much faster clip than the Dow Jones and I would expect this out-performance to continue for the next few years until "gold currency" holders will be able to buy one Dow Jones with just one ounce of gold.So, if Mr. Bernanke does what he believes in - namely that asset deflation has to be avoided at all cost and, therefore, massively prints money, no matter where the Dow will be in future, at 36,000, 40,000, or at 100,000, as some pundits predicted in their in 1999 published books (of course shortly before the market tumbled), you will be able to buy the Dow with ounce of gold worth either $36,000, $40,000 or $100,000.

Now, you may think that I have become insane. That is partially true because I am convinced that the US Fed's monetary policies will lead to exponentially widening wealth inequity and impoverish the majority of US households, which will then lead to social strive, protectionism, war, and the breakdown of the capitalistic system. However, if one considers that in 1932 and in 1980 (see figure 5) one could indeed buy one Dow Jones Industrial Average with just one ounce of gold, then maybe my views are rather conservative. Possibly one will be able to buy, sometime in future, one Dow Jones with just half an ounce of gold!

Are Petrov and Faber right? Only time will tell.

I am not an investment advisor, and this should not be taken as investment advice.

“Much of the fiscal deficit is being funded by foreigners who see U.S. government debt as the ultimate safe haven in all this turbulence,” Greenspan said. “The long American history of honoring our obligations, dating back to Alexander Hamilton, remains a powerful attraction to foreign investors. But there is obviously a limit to the expansion of U.S. federal debt.”

For years, the Maestro told us that the music was not out of tune, that it was simply a new, better type of music. Now that the charade has ended, and economists grounded in reality are speaking up, it is obvious for all to hear that Greenspan was horribly out of tune after all.

Instead of insisting on accurate books, the government encouraged fraudulent bookkeeping. For example, as of 2006:

"President George W. Bush has bestowed on his intelligence czar ... broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations."

The government knew about mortgage fraud a long time ago. For example, the FBI warned of an "epidemic" of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this

These are just some of the many examples of the government aiding and abetting corruption.

Indications from around the world show that the global depression is deepening. Here is a roundup giving the pulse of developments:

Eastern Europe is tanking, and Moody's is warning that Eastern Europe's troubles could spell disaster for banks in Western Europe

Indeed, the Telegraph paints a stark picture of the potential effects of Eastern Europe's meltdown:

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East.

Danske bank is saying that Central and Eastern European countries are "melting down"

American banks may be insolvent, but Nouriel Roubini says that European banks may be in even worse shape than their U.S. counterparts

Japan - which economists had predicted might ride out the crisis better than most - is tanking

Huge moves are apparently being made in the forex and futures markets which do not bode well for economic stability

The Leap2020 forecasters say that governments have not learned anything from the crisis, and are now predicting the collapse of nations and many currencies as a result of the financial crisis and the countries' failure to stabilize the economy

“Three or four years into the future I think we could be in a hyperinflation, within the current year you’re going to see much higher inflation than most people are looking at,” Williams told MarketWatch.

Williams said that his definition of hyperinflation would be a situation in which a $100 dollar bill would become more functional as a piece of toilet paper than a store of value.

“This is a time when you want to preserve your wealth and assets because inflation will knock the value out of it,” he added, advising that people buy physical gold and assets other than the U.S. dollar.

“Then when the hyperinflation hits you’ll see disruption of normal commerce, you won’t have enough $100 dollar bills to buy what you want,” said Williams, adding that items to barter with, such as a bottle of scotch, would be more valuable than actual cash, even in large quantities.

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